chapter 22 - business finance needs & sources Flashcards
roles of finance department
- record all financial transitions
- prepare final accounts
- produce accounting information for managers
- forecasting cash flows
- make important financial decisions
why do business need finance?
- start a business (rent, buy nca, overheads)
- expand a business (buy fixed asset or fund a takeover)
- capital expenditure and revenue expenditure
- pay overhead costs
ways to obtain finance
- internal sources or finance
- external sources of finance
types of internal sources of finance
- sales of inventories
- sales of existing assets
- owner’s capital
- retained profit
definition of:
internal finance
obtained from within the business itself
definition of:
external finance
obtained from sources outside of and separate from business
advantages of owner’s savings
- available to business quickly
- no interest is paid
disadvantages of owner’s savings
- may not be enough/ too low
- increases risks, owners have unlimited liability
advantages of retained profit
- don’t have to be repaid
- no interest paid, doesn’t increase expense of business
disadvantages of retained profit
- reduce payment to shareholders, thus reduce investment in business
- not enough for expansion
- new firms may have much
advantages of sales of inventories
-reduce storage cost
disadvantages of sales of inventories
-might disappoint customers if not enough stock
advantages of sales of existing assets
- makes better use of capital tied up
- doesn’t increase debts
disadvantages of sales of existing assets
- takes time, money not available immediately
- new firms have no assets to sell
types of external sources of finance
- issue of shares
- selling debentures
- factoring of debts
- bank loans
- grants and subsidies
- crowdfunding
- micro finance
advantages and disadvantages of issue of shares
- no need to be repaid
- no interest charge
- dividends have to be paid
- ownership of business change hands to majority shareholders
advantages and disadvantages of bank loans
- quick and easy to arrange
- variable lengths of time
- lower rates offered if business borrow large sums
- repaid with interests
- collateral required as security
advantages and disadvantages of selling debenture
- raise long term loan
- no collateral required
-repaid with interest for long term
advantages and disadvantages of factoring of debts
- immediate cash obtained
- collecting of debts done by factors
-doesn’t receive 100% of value of debts
advantages and disadvantages of grants and subsidies
- doesn’t have to be repaid
- accept conditions - locate in high unemployment area
definition of:
micro finance
financial institutions set up in poorly developed countries to help financially lacking people to start up business
explain micro finance
bank won’t lend bcs they don’t have collateral to offer as security and they only borrow low amount, bank can’t make profit
definition of:
crowdfunding
funding a project or venture by raising money from large num of people who each contribute a relatively small amount, typically via internet
advantages of crowdfunding
- no initial fees payable to crowdfunding
- allow public’s reaction to new’s business venture to be tested
- fast way to raise sums
disadvantages of crowdfunding
- ideas might be stolen
- media interest and publicity need to be generate to increase chance of success
- total amount required not raised, finance promised need to be repaid
